"B.C. Policy Perspectives" is the web log of Mark Crawford. THE PURPOSE OF THIS BLOG IS NOT PARTISAN OR IDEOLOGICAL. INSTEAD, I TRY TO IDENTIFY POSITIONS AND PERSPECTIVES THAT ARE NEGLECTED, DROWNED OUT OR UNDERREPRESENTED ELSEWHERE. Some politicians and journalists have found it helpful and interesting, and I hope that you do, too!
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Saturday, September 12, 2009

GST cuts are STUPID,STUPID, STUPID

Well, I am not running for office, I am not an apologist for any political party, so I can say what I think. The federal government's insistence on cutting sales taxes is not a great idea.

In the short run, insisting on GST cuts merely makes a record federal deficit bigger, cuts into the EI surplus, necessitates the increase of EI premiums, and hampers the government's ability to help Canadians weather the recession.

In the medium term, (i.e. the duration of the recession), the majority of academic economists are surely right when they say that GST cuts are not the most effective way of delivering counter-cyclical stimulus (number 1 is EI , number 2 is infrastructure). When Harper is dismissive of the economics profession saying that "retailers are in favour of it", he is talking about a segment of the population that can only capture a small part of the benefits of alternative spending, but a large part of the benefit of the sales tax cuts. THEIR INTERESTS ARE NOT IDENTICAL TO THE LARGER PUBLIC INTEREST.

In the long run, surely we want to build a taxation system that 20 years from now has both (1) met the challenges of an aging population and the need for wise social investments; and (2) has shifted the burden of taxation away from earned income, savings and investment and towards pollution and expenditures. Our society will be more equitable and efficient as a result. (Even though expenditure taxes are regressive compared to income taxes, that feature can be rectified by devices like the GST tax rebate for people earning lower incomes, and more targetted spending in certain areas.)

The GST cut maybe not stupid politically though---if opposition parties were as strident as I am in this blog, Tories could then say that the Opposition favours "higher taxes"--which is misleading (under the Conservatives' GST cut, Canadians simply will pay out of their other pocket with deficit that is $12 billion higher, EI premiums that are higher and benefits that are smaller, etc.), On the other hand, if the opposition declines to take the bait, it becomes harder to distinguish their policies, or pay for all of their promises.

Pre-recession policies like GST tax cut and $1200 child tax credit feature prominently in Tory ads as part of Canada's "Economic Recovery Plan". What's wrong with that? It certainly saves money to dress up old policies in new clothing, but it makes you wonder if maybe other countries are doing more to use the crisis as an opportunity to build green infrastructure, etc. I suspect that this political management of the recession--just like the Liberal management of Kyoto--is penny-wise and dollar poor.

{BY the way, isn't it remarkable that Stephen Harper can be so responsible for giving minority government a bad name--and then use that effectively as an argument for giving him a majority? It's not that he is so terribly clever; it's simply that he has a huge structural advanatage that comes from having a unified party on the right and a high degree of fragmentation on the centre-left. May I suggest once again that the Green Party step down in 30 Liberal-designated marginal seats and in 15 NDP marginal seats, in exchange for the Liberals and NDP giving Elizabeth May a clear shot at Gary Lunn in Saanich and the Islands?}

My not informed opinion is that the GST cut was clearly badly timed and was pro cyclical and now pro deficit. You make a good point that it may necessitate other inferior tax hikes (e.g. payroll in 2011) and that long run we want to work towards a sales tax base.

The GST cut was stupid, stupid because it was obviously pro cyclical when introduced a step backwards from the the tax planning of dept of finance.

Great point about the Green's standing down and the others letting May run.

Mark - I fundamentally and totally disagree with your basic premise. And as a left-wing commentator I approved of Stephen Harper's cuts to the GST.

You state almost off-handedly the central problem: "(Even though expenditure taxes are regressive compared to income taxes, that feature can be rectified by devices like the GST tax rebate for people earning lower incomes, and more targetted spending in certain areas.)"

In other words, even though there's a bloody elephant in the room, maybe we can find him some peanuts!

I can't figure out why you and other smart folks are not recognizing the obvious - consumption taxes like the GST and the proposed unfair BC HST are inherently regressive, harmful to lower and middle-income earners despite any "rebates" and are a drag on consumer spending.

Income taxes are progressive and do not discourage consumer spending - except for Ferraris perhaps - while ensuring a modest degree of equality within society.

The BC Branch of the Canadian Federation of Students came out with a stunning bit of research yesterday that is somewhat related - BC will soon be collecting more in tuition fees than in corporate income tax!!

That's exactly the kind of wrong-headed thinking the BC Liberals are using - put enormous barriers up to lower and middle income students to attend university with exorbitatn tuition fees while cutting taxes for profitable companies.

I urge you and your colleagues to take another hard look at this issue.

Bill: Perhaps I am motivated in part by a degree of pessimism about selling the middle class in this country on the value of higher progressive income taxes. If governments were to press the issue they could end up creating the American problem--a middle class increasingly alienated and ready to turn its back on public health and education and the taxes to pay for it.

But I think that I am more influenced by arguments I learned at university about improving the trade-off between efficiency and equity--arguments put forward by Albert Hirschman, John Rawls and Arthur Okun in favour of a shift to expenditure taxes. None of those thinkers were especially conservative, all were thinking about the long-run welfare of the least advantaged in society.

Taxing pollution, unearned income and expenditures more means taxing earned income, savings and investment less. The net result is what economists call efficiency--extra wealth that is left on the table by allocating resources better and getting incentives right. If that's such a right-wing idea, why isn't Stephen Harper in favour of it?

I agree that students are getting shafted in BC--and as a post-secondary educator I know how unsatsifactory it is to respond as Campbell has by giving degree-granting status to local colleges without giving them commensurate increases in resources or demanding more from them in terms of how they hire faculty.

That is why I proposed a $200 million bursary program for BC postsecondary students--a way of bringing their debt levels down to below the national average, while not hurting the universities in order to do it.

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On Knowing (1)

"The most perfect philosophy of the natural kind only staves off our ignorance a little longer: as perhaps the most perfect philosophy of the moral or metaphysical kind serves only to discover larger portions of it." ---David Hume

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